Angel Investors – Part One

What is an angel?

Angel investors provide a critical and essential link to fostering a healthy economy.  Angels provide important financial support and business mentoring services to emerging and growing entrepreneurs.  With entrepreneurs creating 70-80% of net new jobs in the U.S. economy, angel investors are a significant asset for a community to possess.

Angel investors tend to past entrepreneurs and retired businesspersons.  They invest immense time in their portfolio companies as mentors, advisors and board members.  Their experience provides invaluable skills to their enterprises.  Angels fall broadly into four categories identified by a study on angel investors by the MIT Entrepreneurship Center.
Guardian Angels – bring both entrepreneurial and industry experience.  Many have been successful entrepreneurs in the same sector as the new companies they back.
Entrepreneur Angels – have experienced starting companies but come from different sectors.
Operational Angels – bring industry experience and expertise, but generally from large, established companies, and may lack first-hand experience with the travails of a startup.
            Financial Angels – typically invest purely for the financial return.

What do angels do?

Historically, angels provide financing from $250,000 to $2 million per investment to 30,000 to 50,000 companies annually.  It is estimated the angel investors provide 90% of the seed and start-up capital in the United States where as venture capitalists invest less than 2% in seed and start-up companies.   Venture capitalists typically invest in later-stage companies.  Experts estimate that on a cumulative basis, the level of investments made by angels over the last 30 years has been double that of investments made by venture capitalists.

Angel funding helped Amazon.com get started.  Amazon.com’s IPO soared 30% above its opening day price, making the company and its investors $54 million wealthier.

Angel Organizations

Angel investor organizations are growing, leaving behind the solo angel format.  Individual angel investors realize many advantages working collectively.  Organizations have the capabilities of making better investment decisions, enhancing deal flow and combining their funds into larger equity investments.  Angel organizations have the leverage to invest in larger projects, filling the capital gap from $2 to $5 million created by the shift in venture capital focus to later-stage enterprises.  

From 1996 to 2003 the number of angel organizations in the United States increased significantly from an estimated 10 to over 200 groups.   Angel organizations typically invest on a regional basis, being interested in personal relationships with companies and employees, as well as in giving back to their communities. According to the report, Business Angel Investing Groups Growing in North America, from the Kauffman Foundation the number of angel groups has increased in response to these factors: 

• A desire to attract better deals and generate higher returns than angels acting alone;
• The growth of venture capital funds and the attraction of venture investing;
• A widening “capital gap” between individual and institutional venture capital investors that has created a need and an opportunity for pooled investments;
• The legal and economic complexity of these investments;
• A large increase in the number of self-made, high net worth individuals who want to be more involved in their alternative asset management;
• The volume of deal flow; and
• Social camaraderie among investors.

Look for Angel Investors - Part Two in the coming weeks.  We’ll be highlighting how Angel Investor networks are set up and the impact they have.